Agribusiness incentives need to consider longer term performance

23 November 2018

Agribusiness needs to consider performance over a longer timeframe and not just over an annual performance cycle. Poor choices one year can lead to losses in future years. Rewarding performance via the use of short term incentives (STIs) can at times drive the wrong behaviour. Incentives need to consider a longer term horizon. Short term incentives could include a deferral period, perhaps over a rolling three-year cycle. In this way decisions aren’t focused merely on annual performance but take into consideration longer term objectives.

Within the agribusiness sector long term incentives (LTIs) can be used as part of an executive's remuneration package. LTIs can be designed to help with retention, ownership transfer and/or succession planning - and perhaps be less about annual performance. Retention is particularly important given that agribusiness business plans generally require 5-10 years for realisation.

A possible combination would include the use of STIs and LTIs. Short term incentives could be designed to include a deferral element. This is where a portion of the inventive payment is withheld and paid in future years. The LTI component could be used to help promote succession planning and retention of the executive. This will to a large degree avoid ‘short-termism’ at the expense of longer term sustained performance.

The timing of an STI can present challenges for agribusiness boards. A recently announced performance of AACo is likely to result in a debate on the past and current incentive scheme for its chief executive. Clawback provisions and/or deferral may alleviate some of the discontent felt by shareholders and better align incentives with longer term performance objectives.

Designing a remuneration strategy needs to be developed considering a range of factors including the context within which the organisation operates. For example, an agribusiness company will not generally remunerate as aggressively as a finance sector organisation. The reasons for working in each may be different but pay needs to be considered within an organisations unique context. It also needs to consider other people related factors such as the management style of the organisation, levels of flexibility afforded to employees, opportunities for development and also how well individual and collective effort is recognised and rewarded.

For further information on how to design an appropriate incentive and performance framework please contact BDO.